A breakup fee is a pre-agreed payment specified in a merger or acquisition agreement that becomes due if the deal does not close under defined conditions. It is typically described in the contract with details on the amount, payer, and triggering events, and is intended to deter opportunistic action and to compensate the other party for deal-related costs.
Breakup fees appear in merger agreements for many corporate transactions. The fee amount is often a fixed percentage of enterprise value or equity value and is typically paired with other provisions such as no-shop or go-shop clauses, which allow or require the target to seek alternative offers for a limited period. The triggers can include termination of the agreement by either party under specified circumstances, failure to obtain regulatory or shareholder approvals, or a material breach of covenants. In addition to deterring disruption, the fee helps allocate costs associated with due diligence, negotiations, and deal structuring. Some deals also include a reverse breakup fee, where the payer is the acquirer if it terminates for certain reasons. Terms vary by deal and are subject to review under relevant competition laws and corporate governance norms.
In a hypothetical deal, the merger agreement includes a breakup fee of 2% of the target's equity value payable to the acquirer if the target terminates the agreement to pursue a superior proposal.
Mergers and Acquisitions (M&A) · Merger Agreement · Termination Fee · Reverse Breakup Fee · No-Shop Clause · Go-Shop